Types of Wrap Mortgages

The Short Version

Wraparound mortgages (wraps) have recently regained popularity in creative finance real estate transactions.

Wraps are a form of seller financing in which an underlying lien remains in place (similar to a subto transaction).

Wraps may act as a “passthrough” for the existing loan with no change to the terms and balance, or they may act as a “container” which holds the existing loan(s) and a markup in principal balance and/or interest rate.

Wraparound Mortgage

A wraparound mortgage is a form of financing in which an existing loan(s) is incorporated (wrapped) into a new loan of same or greater value and same or greater interest rate.

The wraparound mortgage gives the seller a lien position so they can foreclose if the buyer doesn’t make payments or otherwise defaults. In a subto transaction, there’s no such protection for the seller.

Functionally, the buyer makes payments to the seller, who then continues to pay their original mortgage and keep any difference (if any). The actual payment arrangement may vary.

Mirror Wrap - The Passthrough

A mirror wrap is also known as an exact wrap. There is no markup of the principal amount or the interest rate.

In a mirror wrap, the seller doesn’t make any monthly profits. It’s effectively a passthrough construct that grants rights of foreclosure to the seller in case the buyer defaults.

Equity Wrap - Increasing the Principal Balance

In an equity wrap, a portion of the seller’s equity is financed in addition to the underlying debt (mortgage).

In this arrangement, the seller becomes the lender and provides financing to the buyer. The seller earns interest on the portion of the loan amount that’s higher than the bank debt. For example, a $200K wrap mortgage may contain $150K bank financing and $50K seller equity.

In this scenario, the interest rate on the combined loan balance may be higher than that of the first mortgage(s).

Rate Wrap - Increasing the Interest Rate

In a rate wrap, the balance of the underlying loan(s) aren’t changed, but the interest rate is increased. This drives up the monthly payment, and the seller keeps the difference between the original mortgage payment and the incoming payment from the buyer.